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On Dec 13, 2013, we have reiterated our Neutral recommendation on the coal producer Arch Coal Inc. (ACI - Analyst Report). The company currently has a Zacks Rank #3 (Hold).

Why the Reiteration?

In the third quarter of 2013, Arch Coal’s loss of 1 cent per share was much narrower than the Zacks Consensus Estimate of a loss of 30 cents. However, the company generated profits in the year-ago quarter. 

The prevailing oversupply in the global metallurgical coal (“met coal”) market led to the bottom-line underperformance. Arch Coal’s reported revenues failed to beat the Zacks Consensus Estimate as well as the prior-year figure, mainly due to a 23.6% drop in the average sales price per ton of coal.

Recently, Arch Coal has introduced long wall mining techniques at its Leer mine in Tygart Valley, northern West Virginia. The company invested $400 million to develop this mine. The company is expected to produce increased volume of high quality met coal from first-quarter 2014.

As per the World Steel Association report, utilization of steel is expected to increase in 2014, primarily on the back of strength in the automotive, energy and residential construction sectors. The increase in coal production will enable the company to meet higher met coal demand in the near term.

On the flip side, in Sep 2013, the U.S. Environmental Protection Agency (EPA) proposed Clean Air Act standards to minimize carbon pollution from new power plants, including coal-fired set ups. The EPA plans to implement the new standards to support President Obama’s Climate Action Plan, announced in Jun 2013.

To cope with the proposed mandates, the utilities will have to implement expensive technology at their new coal-fired plants to reduce CO2 emissions, which will subsequently increase operating costs. The companies can shift their mode of power generation to natural gas and alternate energy sources to avoid incremental spending. This will impact coal demand, thereby affecting Arch Coal’s performance.

Other Stocks to Consider

The stocks in the sector that are currently performing well include Abraxas Petroleum Corp. (AXAS - Snapshot Report) with a Zacks Rank #1 (Strong Buy), and Alpha Natural Resources, Inc. (ANR - Snapshot Report) and Suncoke Energy Partners, L.P. (SXCP - Snapshot Report) with a Zacks Rank #2 (Buy).

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